Can India compete with China in manufacturing? What's next for India?

Talking about India and China is such a cliche these days that I am really dreading writing this post. But this is my attempt to dig a little deeper that the usual soundbites coming out of WSJ and NYT.

Lately I am hearing a lot of talk about how India with its cheap labor pool and upcoming labor reforms could attempt to successfully compete with China in manufacturing. China's dominance is surely awe-inspiring but can India compete effectively with China in manufacturing?

Note: In the following discussion when I use the word India or China - I usually mean that to refer to Indian and Chinese manufacturers or companies and not as much to the nation itself. It would be foolish of me to postulate on what such highly complex societies and nations should or would do in the future.

China dominance in manufacturing outsourcing:
In trying to understand this issue, let me first discuss where China comes from. So why does China dominate in manufacturing? Is it just because of low-cost labor and favorable govt. policies? But these two specific factors exist in quite a few countries including Thailand, Vietnam and increasingly India. The answer unsuspectingly lies a little deeper. China dominates not because it is cheap but because it is FAST (reference - a must read on this topic). Companies outsource to China not only because it is cost effective but also because Chinese manufacturers are known for fast turnaround on orders and to quickly adapt to design changes. This is an outsourcers dream! And over the years both the companies in the developed world and Chinese have developed tremendous expertise in working together - from understanding the intricacies of the relationship that exists in the ecosystem of small and nibble suppliers in places such as the Pearl River Delta to comprehending the true capabilities of its supplier base. As a result of this expertise, for some companies their Chinese supply chain is their IP. And no company wants to mess around with its IP. As a result, I believe it is almost impossible for someone else to unseat the Chinese dominance in manufacturing in the near future. There might be small victories in specific sub-sectors such as we have already seen in auto parts in India but a large scale unseating seems increasingly remote.

So what should India do?
To better answer this question, let's extrapolate where will China go from here? I believe that just like the Indian outsourcing companies are trying to move up the value chain, Chinese are doing the same in manufacturing. This implies participating in designing products to building brands to selling the product in retail stores. Does that mean we will see the likes of world-dominating Apple to P&G to Wal-mart coming out of China soon? We do see some signs of it through companies such as Lenavo, Haier etc but I believe that future is little further out. There will be an intermediate step - where I believe India can/should play a part.

How does India play a role in this?
For the reasons stated above, I believe, India or for that matter any other country would be ill-advised to focus its energies on unseating China dominance in manufacturing. Rather they should compete with China on its next big move up the value chain. As the China moves up the value chain to areas such as design, product development, branding etc, it will bring the same disruptive cost efficiencies and speed that it bought to manufacturing. In response to these threats, the companies in the developed world will increasingly look to compete effectively by outsourcing low-value added jobs of these functions. With a huge pool of talented, creative, English-speaking workforce India could work with its US counterparts in increasingly outsourcing these functions. Why can't China do the same - yes it would for sure but at least India and China are on the same ground while competing for this new piece of business. China lacks experience as much as India in this new areas. Some might argue that India with its free market economy tradition of competing on design/brand building and English Speaking workforce has an advantage. But that remains to be seen. But I will take this bet any day over the other.